The consequences of a conspiracy to commit an offence of insider dealing concerning RBS shares might not be of obvious interest to a family property lawyer. But in Patel v Mirza [2016] UKSC 42, the Supreme Court held that the House of Lords’ decision in the well-known domestic property case of Tinsley  v Milligan [1994] 1 AC 340 should no longer be followed.

The illegality defence and the principle in Tinsley  v Milligan [1994] 1 AC 340

T and M bought a house to live in. T and M understood that they were joint beneficial owners, but legal title was in T’s sole name. This was to enable false claims to benefits to be made. M subsequently confessed to the DSS. T moved out and served notice to quit on M. T and M issued cross-claims for declarations of ownership: T that she was sole owner, M that T held it on trust for both in equal shares.

The trial judge found for M. The Court of Appeal and House of Lords dismissed T’s appeals, both by a majority. Lord Browne-Wilkinson, giving the leading speech of the majority, held that title to property can pass under an unlawful transaction. However, whether that illegality could be a defence to M’s claim depended on ‘the reliance principle’. This was that [375C] ‘A party to an illegality can recover by  virtue of a legal or equitable property interest if, but only if, he can  establish his title without relying on his own illegality.’ M had established a ‘resulting trust’, simply by showing that she had contributed to the purchase price (Tinsley was decided in the era pre-Stack v Dowden [2007] UKHL 17, when there was less of a distinction drawn between ‘resulting trusts’ and ‘constructive trusts’).  It was unnecessary for M to show why  this transaction was undertaken. Consequently, M succeeded in her claim, as she  did not need to rely on her illegal conduct to establish it.

Tinsley became the subject of significant criticism. The Law Commission considered that it resulted in arbitrariness and uncertainty, giving rise to potential injustice. For example, in Tinsley, had the parties been father and daughter, the outcome would have been reversed, as instead of the presumption of a resulting trust, there would have been a presumption of advancement, rebuttable only be reference to the illegality. More recently, the Supreme Court has demonstrated a clear division of opinion as to the correct approach to illegality. In Patel v Mirza [2016] UKSC 42, the majority of the Supreme Court favoured the more flexible approach.

Patel v Mirza [2016] UKSC 42

M, who had contacts at RBS, expected to obtain advance insider information concerning an anticipated government announcement.This would affect share prices. P transferred £620,000 to M to use this insider information to bet on the price of shares. The announcement did not occur, so nor did the betting. Nonetheless, the agreement itself amounted to a criminal conspiracy to commit insider dealing. P sued M for return of the money. His claim had various bases, including unjust enrichment based on failure of consideration. This was important. P had to establish the nature of his agreement in order to establish the consideration.

The trial judge found for M, based on the ‘reliance principle’. Further, P could not rely upon the exception known as ‘locus poenitentiae’, because he had not voluntarily withdrawn from the arrangement. The Court of Appeal unanimously allowed P’s appeal. The majority agreed with the trial judge on the reliance principle, but found that P could benefit from locus poenitentiae, because the agreement had not been executed. However, Gloster LJ held that Tinsley laid down no universal rule. Rather, it was necessary to consider whether allowing the claim would stultify the underlying policy which resulted in the illegality. In this case, the mischief of insider trading was market abuse, which had not happened, and P was not seeking to benefit from his wrongdoing. In any event, Gloster LJ considered that the ‘reliance principle’ would not defeat the claim: P needed only to establish that funds had been paid for the purpose of share-price speculation which never occurred; and if the ‘reliance principle’ were engaged, the majority were correct that P benefited from locus poenitentiae.